Policy Makers Intensify Response to Virus Amid Economic Fear

(Bloomberg) -- Global policy makers sought to reassure markets that they’re ready to respond to the coronavirus outbreak, as fears mount that its spread could push the world economy toward recession.

Australia’s central bank reduced the cash rate Tuesday by a quarter percentage point to 0.5%, a record low. That marked a stunning reversal in recent days, with money markets predicting as recently as last Friday that the Reserve Bank would hold rates steady.

The virus outbreak “is having a significant effect on the Australian economy at present,” RBA Governor Philip Lowe said in a statement.

Central bankers in the U.K. and Japan pledged to act as needed to ensure stable financial markets, while leaders of the International Monetary Fund and World Bank said they stood ready to help member nations. Group of Seven finance ministers and monetary officials will speak by teleconference Tuesday, people familiar with the matter said.

Late Monday, European Central Bank President Christine Lagarde issued a statement on the risks for the economic outlook and markets, pledging to “stand ready to take appropriate and targeted measures, as necessary and commensurate with the underlying risks.”

The intensifying concern follows a warning from the OECD that the world economy faces its “greatest danger” since the financial crisis more than a decade ago. With the global economy already on course for its weakest growth since 2009, the group said a “longer lasting” outbreak of the virus could result in recession-like expansion of just 1.5% this year.

Days after Federal Reserve Chairman Jerome Powell opened the door to a U.S. interest rate cut this month, the prospect of central bank action sparked a rebound in stocks around the globe, sending U.S. equities to their first gain in eight sessions.

In an emergency statement Monday, Governor Haruhiko Kuroda said the Bank of Japan will “strive to provide ample liquidity and ensure stability in financial markets.” The Bank of England said it’s working with U.K. and international authorities to “ensure all necessary steps are taken to protect financial and monetary stability.”

Money markets now expect the Fed to lower its benchmark rate by 50 basis points this month, and give a greater-than-90% chance that the ECB will pare its rate by 10 basis points. They’re pricing in a 25 basis-point reduction from the BOE this month as well.

Economists at Goldman Sachs Group Inc. predict the Fed will ultimately cut rates by 100 basis points in the first half of the year. There’s even speculation that the U.S. central bank will move before policy makers are next scheduled to meet March 17-18, with some economists seeing the potential for an internationally coordinated cut for the first time since 2008.

“Global central bankers are intensely focused on the downside risks,” Goldman economists led by Jan Hatzius said in a report Sunday. “We suspect that they view the impact of a coordinated move on confidence as greater than the sum of the impacts of each individual move.”

Investors increasingly believe central banks in Canada and Malaysia also will ease at their scheduled meetings this week.

With interest rates already low, governments may need to do more to support demand. Economists at Morgan Stanley forecast the combined fiscal deficit of the four largest advanced economies, plus China, will now run to at least 4.7% of global gross domestic product this year, the largest share since 2011.

Italy already is seeking to widen its budget deficit to pay for at least 3.6 billion euros ($4 billion) in proposed emergency economic measures.

Just a week ago, key central bankers were saying it was too soon to respond to the outbreak, a reticence to act that may reflect a reluctance to be seen racing to rescue investors. The subsequent plunge in global stocks forced a change in stance.

“Central banks will almost certainly all induce one form of easing or another, “ said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore.

The Bank of Japan backed up Monday’s promise by offering to buy 500 billion yen ($4.6 billion) of government bonds to provide liquidity. Indonesia’s central bank lowered the amount lenders need to keep on reserve, seeking to shore up market liquidity.

By not alluding to monetary policy as Powell did, Japan’s statement revealed the constraints on the BOJ and many other central banks. Japan’s key rate is already minus 0.1%, compared to the Fed’s 1.50%-1.75% range.

The ECB is also limited by a deposit rate of minus 0.5%. Policy makers are reluctant to reduce it further given concern that banks, who already are seeing profit margins squeezed by negative rates, might pull back on lending.

Before Lagarde’s statement Monday, Vice President Luis De Guindos signaled that’s still the prevailing sentiment.

“The main front line of response has to be fiscal policy,” he said at a conference in London. “When you have a problem you can’t always look at central banks. We are not almighty.”

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Even before the latest crisis, economists were questioning the benefits of ultra-loose monetary policy, given more than 700 interest-rate cuts and several rounds of bond-buying since the financial crisis. Those moves boosted asset prices but failed to generate substantial rebounds in economic growth.

For central bankers, the new challenge is that easier policy may be even less effective to combat the economic pain posed by a health emergency.

That’s because, by shutting workplaces in China and elsewhere, the virus is dealing a blow to the world’s capacity to produce goods. Lower rates won’t help manufacturers whose factories are closed or that lack materials to make their products. On the demand side, they would likely fail to spur consumers to shop or travel if they’re worried about infection.

But easier monetary policies should counter tighter financial conditions, support markets and maintain the supply of credit, thus helping to drive a rebound in demand once the virus is under control. Weak inflation also gives most central banks scope to act.

“Rate cuts are not the silver bullet, although they can support markets somewhat,” said Jerome Jean Haegeli, chief economist at the Swiss Re Institute in Zurich.

--With assistance from Jana Randow and Scott Lanman.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net;Enda Curran in hong kong at ecurran8@bloomberg.net;William Horobin in Paris at whorobin@bloomberg.net

To contact the editors responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, ;Margaret Collins at mcollins45@bloomberg.net, Michael S. Arnold

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